unhappy economies: greek debt, PIIGS and the eurozone crisis

Oisín Mac Giollamóir explains the meaning of the current European crisis, and the relationship between debt and class struggle

Happy economies are all alike; every unhappy economy is unhappy in its own way. The well-worn acronym PIIGS (Portugal, Ireland, Italy, Greece and Spain) conceals more than it reveals. The PIIGS are not all alike.

Consider the difference between Ireland and Italy. Pre-crisis Ireland had a debt/GDP ratio of 25%, one of the lowest in Europe. Today it’s over 100% and is projected to rise to over 120%. Ireland’s crisis is not due to an over-expanded public sector, unsustainable spending, persistent budget deficits or anything like that. It is due to the bubble in the property market and the ongoing mismanagement, largely at the European level, of its collapse . Over the last four years Ireland’s economy has been wrecked by the crisis.  In contrast Italy has had major problems for sometime. Italy’s debt, which has already reached 120% of GDP, does not reflect the kind of rapid shift that has happened in Ireland. Rather Italy has had a long run budget problem. Italy’s debt has not been below 100% of GDP since the early 90s. Italy’s debt problem cannot be blamed exclusively on the crisis in the same  that Ireland’s can.

It is therefore important not to conflate the differing problems faced by the PIIGS. When we talk about the Greek crisis we need to be aware of the particular nature of Greece’s problems.

Class Struggle and Greek Debt

The Greek crisis is more similar to that of Italy than Ireland. Greece has had a debt to GDP ratio of over 90% for very many years. A part of this was due to maintaining a large public sector and a generous welfare state while simultaneously tolerating widespread tax evasion amongst the business class. Norman Strong has argued “Fundamentally, fifteen years ago, Greece faced a choice between being the kind of country that doesn’t collect taxes on the middle and upper class, or the kind of country that pays generous benefits and public sector salaries, and chose both.” A contradiction persisted in Greek society whereby the privileges of the ruling class were maintained, in the form of corruption, cronyism and minimal taxation, along with a substantial welfare state and general tolerance to working class militancy. This is partially because of the class struggles, starting with the Athens Polytechnic Uprising of 1973, which led ultimately to the end of the military junta in 1974 and the restoration of liberal democracy. The class struggles in Greece in the 1970s were intense and when PASOK (The Panhellenic Socialist Movement) was elected to government in 1981 they began constructing a relatively rudimentary welfare state. And they increased public sector wages despite not securing any increased revenue sources. As such, debt rose from 22.9% of GDP in 1980 before they took power to 76.9% in 1990 when they lost power after two inconclusive elections. However, the pro-labour agenda of PASOK was to some degree abandoned in 1985 when PASOK tried to pull back the concessions made to the working class and launched an austerity program. This austerity program was met by strikes in numerous sectors such as amongst teachers, at public utility companies and by bank officials. Since 1985 there have been continuous attempts to reduce working class living conditions in Greece and to balance the budget, but, due to working class resistance on the one hand and a reluctance to go after tax evasion amongst the upper classes, debt continued to climb. By the mid nineties debt had risen to close to 100% of GDP and for the last decade has fluctuated somewhere above that figure. (TPTG: Burdened With Debt).

Although the structural deficit that has existed in Greece for thirty years needs to be understood in relation to class struggle, we should not infer from that that the working class in Greece has won major victories, or that living standards in Greece are of a high standard. The problem is that the Greek state has been unable to acquire the revenue needed to maintain a functional welfare state and has tried to solve that problem by attacking the working class. Despite claims by Angela Merkel to the contrary, workers in Greece are far from being lazy or privileged. According to the OECD, Greeks worked on average 2,120 hours a year in comparison to 1,653 in the UK and 1,430 in Germany. In the OECD only South Koreans work more. Paid leave entitlement is 23 days a year while in the UK its 28 and in Germany 30. The average age of exit from the labour force is slightly above the EU average, being respectively 61.7 and 60.9. And the economy was growing impressively in the run up to the crisis; it was in the region of 4% for most of the noughties.

So the crisis in Greece is very different to that in Ireland or Spain. Whereas in Ireland pre-crisis there were balanced budgets, low debt but an out-of-control financial sector, in Greece there was a structural deficit, high debt but a relatively strong economy.  So if the notion of Greek workers living it up beyond their means is off, why is there the crisis? What’s wrong with the Greek economy? The answer is that Greece’s problems are because of the government, the international crisis and the euro.

Deficit lies and interest rates

All governments are to some degree financed by debt. They borrow money on the financial market by selling debt, which is then traded on the international financial markets. The markets determine the interest rate on the debt i.e. what interest rate the government can borrow from the markets at. Obviously the higher the interest rate the harder it is for a country to borrow. Interest rates on government debt are largely driven by fears of inflation, fears of default and the return on alternative investments.

When a country runs a budget deficit it must cover that deficit by borrowing. Greece, as noted above, has been running very large budget deficits pretty much continuously for thirty years. And as such Greece has been getting into more and more debt for decades. When the crisis hit in 2008 Greece suffered a recession like everywhere else, indeed a slightly worse one than many places as Greek growth was dependent on the availability of easy credit and involved a large construction sector. However, it was only in late 2009 when PASOK was elected to government that the crisis really hit. PASOK found that the outgoing government had been keeping fraudulent accounts and that the budget deficit forecast was completely off. The outgoing government had it at 6-8% of GDP, it was eventually revised to 15.4%. As it was revealed that Greece’s fiscal position was far weaker than previously thought, the market reacted by pushing up interest rates. For example, the interest rate on Greek two-year debt was, prior to these announcements, floating around 1.3-1.7%. This is the same range as German debt was at the time. However, gradually in the months that followed, and as it became clear from the class struggle underway that getting the deficit down would prove a difficult task, the interest rate on Greek debt began to climb rapidly. By the 6th of May 2010, the interest rate on two-year debt had risen to 16.361% and on 10 year debt to over 11%. As interest rates increased it became more and more difficult for the Greek government to finance its commitments. On April 23rd 2010, the Greek government requested a ‘bailout’ package from the EU, IMF and ECB. On May 1st a severe austerity plan was announced. It was scheduled to be voted through on May 5th and 6th. In response a general strike was called for May 5th.  On that day, 500,000 people marched through Athens, attempts were made to storm the parliament or prevent it from voting, widespread rioting occurred and three bank workers tragically died after their employer locked them into their boarded up workplace which was petrol bombed by anarchist insurrectionists. Nevertheless, the austerity plan was voted through and interest rates on government debt quickly fell but not by much. Rather than returning any where near the level of October 2009, they returned to the level of mid April 2010 and then once again began a slow upward crawl.

Cutting costs relative to what?

It was possible to see before hand that the ‘bailout’ plan for Greece wouldn’t work. There is no way of Greece being able to pay off its debt without very high levels of growth and there is no way of Greece growing when public spending is being cut to the degree that it is. The idea that by cutting public expenditure Greece would get its ‘house in order’ and then everything would be fine was always idiotically wrong. The problem is that the Greek crisis is and always has been a European crisis. If Greece still had the drachma (the Greek currency before the euro), and had drachma denominated debt, the Greek central bank could pump money into the economy (this would stimulate the economy) and allow it currency to deflate (this would increase Greece’s international competitiveness while simultaneously decreasing the real value of its debt and debt within its economy). Unfortunately, it can’t do that. So Greece is supposed to increase its competiveness by cutting wages and spending. The idea here is that this will 1) cut expenditure and solve the budget problem and 2) drive down costs, attract investment and stimulate growth. But you can’t cut your way to prosperity. The Greek government can cut its expenditure as much as it wants but unless its revenue either stays the same or increases these cuts will achieve next to nothing. Likewise, wages and costs can be pushed down as much as you want but unless there is a demand for Greek produce, Greece will not be able to attract the investment necessary to grow. And in a vicious circle, if Greece doesn’t grow, tax revenue will not rise and the austerity will achieve little.

A simple question then arises, why doesn’t the European Central Bank do what the Greek central bank would do if it still had the drachma, i.e. pump money into the economy. Before this question is answered it is worth noting that not only is the ECB not doing this, it is doing the opposite, it is increasing its interest rate i.e. it’s pulling money out of the economy. Why is the ECB doing this? It is difficult to explain but a major reason is that the declared “primary objective” of the ECB is maintaining price stability and that its pursuit of other “general economic policies” should be conducted “without prejudice to the objective of price stability”.  Why does the ECB care about price stability so much? Well essentially because the stable value of money is at the heart of capitalism.  Think briefly of Marx’s definition of capital M-C-M’. If the value of M (money) in terms of C (commodity) changes in the courses of the circuit, capital faces extremely major difficulties in realizing itself. Or in the words of the ECB, price stability is necessary because it “allows [people] to make well-informed consumption and investment decisions and to allocate resources more efficiently”. So because inflation has been over 2% (which is the declared inflation target of the ECB) for most of the year, the ECB has started increasing its interest rate in order to decrease inflation. (The policy still in some ways doesn’t make sense because the EU Commission has said that domestically driven inflation is subdued and all the inflationary pressure is coming from commodity and fuel prices.)

A further reason that the ECB isn’t doing and can’t do what an independent Greek central bank would do is because part of the effect deflating the drachma would have would be by decreasing the price of Greek exports relative to other European producers. This latter point is important and is worth pulling apart a little bit. If according the ECB/IMF/EU troika what is needed in Greece is austerity to push down costs in order to compete and attract investment it needs to be asked: cut costs relative to what? As I just said, the answer is: cutting costs relative to other European countries. However, if this is the case then Greek costs relative to Germany could be decreased either by cutting costs in Greece, increasing costs in Germany or some combination of both. This may seem banal but the point is that wage rises in Germany would to a large degree remove the need for wage cuts in Greece.

But, this is not being pursued because of the accumulation regime currently at work in Germany. This operates by running persistent current account surplus. The most important thing in running a current account surplus is exporting more than you import. This necessarily involves keeping domestic investment below national savings. Put more simply,  in order for a country to export more than it imports it needs to invest abroad. Capital accumulation in Germany worked by people saving a lot and wages being kept low. This kept export prices low facilitating export led growth and causing current account surpluses. These surpluses were balanced on the capital account through investing abroad, in particular in the PIIGS. Germany has had major economic problems since reunification but the growth path it has been on for the last decade or so has served it well and there is a great reluctance to move away from it regardless of the balance of payments problems it is creating.

German creditors versus Greek taxpayers

There is therefore a conflict of interest in the Eurozone. It is in the interest of Greece and the periphery to have an expansionary monetary policy, matched with increased spending in the core while it is in the interest of creditors in the core to more or less keep things as they are. A further problem is that creditors lose money when expansionary monetary policy is used as they see the value of their loans decrease. Given that the PIIGS’ creditors are either domestic or German, French or UK investors, the reluctance in the core to have creditors suffer the cost of any recovery plan becomes easier to understand.

Now this might seem myopic.  Could it be that Merkel is really pursuing the interests of German capital single-mindedly without due consideration to the problem this poses to European capital? Without wanting to overstate this, it is being widely discussed. Helmut Kohl, Merkel’s party mate and previous holder of her current position as Chancellor, said that Merkel’s “destroying my Europe”. And Volker Rühe the German defence minister under Kohl has also raised questions about her commitment to Europe saying her management of the current European debt crisis is “wanting” and that “Germany is not fulfilling its leadership role”.

So why has Merkel been so reluctant to take a more European perspective? Part of the reason, as explained in a previous article for the Commune, is that the function of a capitalist state is managing the class relation. This is done primarily through the national myth, i.e. through maintaining a belief in the common interest of all citizens of a nation state in ‘their’ national capital (growth, competiveness, development etc.) Faced with an economic crisis and electoral risk (as Merkel was in the run up to the first bailout) the response is often populism. The presentation of the crisis was one where German national capital was not at fault and with that the German people were not at fault. This oddly bound the German state into pursuing a more nationalist approach than would be in the interest of its national capital considered in isolation from task of politically managing the class relation. If the German state can get German investments in bad Greek debt covered by Greek workers and taxpayers it avoids the politically difficult task of transferring wealth within Germany from workers to investors. It also enables the development of a narrative whereby the crisis is the fault not of capital, German included, but of Anglo-Saxon liberalism with its financialised capitalism or the fault of lazy Greek workers. However, if, as is the case, Greek workers are simply unable to pay off the bad debt that exists in Greece, the political problem of getting German workers to bailout investors ceases to be avoidable. Over the last few weeks what we have seen is the partial realization of that fact. And the partial realization of the danger attached to Greek default.


The danger attached to Greek default is very real. Firstly there is the risk of contagion. If Greece did default, it is almost certain that interest rates on Portuguese and Irish debt would rise so high and so quickly that it would almost certainly also force them to default. Along with that, exposure to bad debt would destabilize the entire European financial system. Germany, France, the UK, Germany, Belgium and other eastern European countries which are either somewhat unstable as it is or are simply exposed to a good deal of debt, would suffer a financial crisis that would make the collapse of Lehman Brothers seem minor. It is also difficult to see how any of this could happen without Greece, Portugal and Ireland leaving the Eurozone. And if the Eurozone begins to crack it will most likely shatter. The danger then is the most major financial crisis in Europe since the Creditanstalt crisis of 1931, or perhaps ever, the break up of the Eurozone and the major, perhaps fatal, damage that would do to the European project.

Thursday’s child has far to go

Serious disaster looms. So how does the new bailout deal, signed on Thursday 21st, deal with this? Is disaster avoided? The short answer is no. The agreement includes a number of changes. Perhaps most significantly the EFSF (European Financial Stability Fund) has been expanded both in terms of its remit and in terms of its budget. However, the increase in its budget is relatively small. As Willem Buiter, chief economist at Citigroup Inc. put it “The EFSF has gone from being a single-barreled gun to a Gatling gun, but with the same amount of ammo… It needs to be increased in size urgently.” The expanded EFSF is a bit like a European IMF, and a very long way from any kind of organ for a consolidated fiscal policy. Another change is the loans to Greece, Ireland and Portugal by the EFSF will be at a lower non-punitive interest rate. There are some vaguer commitments to further fiscal consolidation, stronger economic governance, less reliance and credit rating agencies, a growth strategy for Greece and a non-vague but implausibly ambitious commitment to have euro area deficits below 3% of GDP by 2013. Finally, there is the question of default. All the credit rating agencies have said that Greece is now going into some kind of default. Fitch has said Greece is in temporary default. S&P has said it is in selective default. And Moody’s has said that the likelihood of a default is “virtually 100%”. The ‘default’ is very unusual because it is entirely voluntary on the part of the creditors. The exact details of it are rather complicated but the thrust of it is that a lot of the debt is going to be extended into long-term debt thereby removing the pressure from Greek finances. However, the question of whether it removes enough pressure is up for question. The expected reduction in the value of Greece’s outstanding loans is 21% while some people such as Gary Jenkins, head of fixed income research at Evolution, argued limiting private sector bank losses to 21% was not enough to save Greece from years of austerity: “To give Greece a fighting chance they probably need a writedown close to 65%”. Further, the agreement has yet to be ratified by all the EU’s national parliaments, and this could pose major problems yet.

Where we stand

Taking for a moment the old Marxist distinction between objective and subjective conditions, we can say clearly that the current situation in Greece is objectively ripe for revolution. Popular faith in the state and the market has been shattered. This has happened not by argument but because of the evident inability of our current social system to satisfy our needs despite the productive capacity to do so. The working class in Greece routinely is out on the streets fighting. But revolution and communism is not on the table. It seems that all is missing is the subjective element but this instinctively seems like the wrong conclusion.

The current nexus of class forces in Greece and across Europe is not a cause for optimism. The European working class is far from capable of exercising a coordinated attack on the power of Capital. On a national and local level struggles are being conducted in a fragmented manner. However, small victories are being won. In Britain, the U-turn on the privatization of forests and nature reserves is one of the few national victories. On a more local level more victories are being reported such as saving the disabled person bus pass in Reading. Or as reported in the August issue of ‘the commune’, some struggles over compulsory redundancies have been successful. However, these struggles are often extremely limited and the victories are so small as to demonstrate our relative weakness rather than our relative strength. For example, despite the intense struggle against pension reform in France, the actual concessions made by Sarkozy are miniscule.

There are two striking issues regarding the struggles against austerity. Firstly, there is the ‘indignant’ aspect to it. This is seen most clearly in the square occupations in Greece and Spain. But the political articulation of middle class proletarians demanding what they see as rightfully theirs, not in terms of income or wages, but in terms of democracy, is something that seems to be a property of many of these struggles. Of course articulating demands in terms of an entitlement is not new but is worth being conscious of especially in terms of understanding how the limits of these struggles develop.

The second striking aspect is the speed at which these struggles escalate and then subside. In almost every major struggle that has occurred against austerity it has arisen largely outside of the ‘official’ left. So for example in the UK the student movement developed largely through the occupation movement and NCAFC. The National Union of Students was basically irrelevant. However, just as the movement seemed to come from nowhere, it has now subsided and left very little in its wake apart from a highly politicised milieu.

Faced with the crisis in Europe, the struggles seem to largely remain at this level. They rise quickly and fade away quickly and engage in rhetoric that points to the hypocrisy of Western capitalism but that fails to point beyond it. On the right however, the response has been clearer. The rise of parties such as the Swedish Democrats, True Finns and the Popular Orthodox Rally has been observed across Europe. Generally this new upsurge in the far right is united by a belief in the welfare state, an opposition to immigration and a strong euroscepticism. This populist response to the crisis is easy to understand. The crisis is one of ‘globalisation’ i.e. supra-national governance and globalized capital markets. The fact that people are responding to the treat posed by global capitalism by wanting to retreat to a nationalist social democracy is not surprising. But it is a dead end. National states are not able to withdraw from capitalism. And even if they could they would not have removed the root cause of the crisis which is the uncertainty inherent in capital’s self expansion.

The crisis in Europe is far from over. As of today (August 2nd, 2011), for most of the PIIGS the bounce back following the new deal of Thursday July 21st seems to have already ended. Interest rates for Ireland and Portugal seem to have stopped falling. For Spain the rates after falling a bit have risen back to just below their level on the 21st. While in Italy, interest rates are already higher than they were. It already seems beyond doubt that the new deal hasn’t worked. We can expect more struggles and more reaction in the months to come.

One thought on “unhappy economies: greek debt, PIIGS and the eurozone crisis

  1. I have not had time to read all this article yet. I agree with most I have read so far. However, there are a coiple of points I’d take up. Firstly, you talk about Greek GDP growth of 4% prior to the crisis. However, part of the fraudulent accounting by the previous Government related to what real GDP growth was. Moreover, as you point out the growth that did occur was largely based on access to cheap credit, and the construction boom this created. In that respect it makes Greece more like the situation in Spain. In part, that is also the case with Ireland, which had massive private debt due to the property boom, which then had to be bought up by the State when the property market collapsed.

    I’d also question the argument in relation to the Drachma. Had Greece retained the drachma it would never have been able to borrow at cheap rates in the first place. Moreover, the devaluation argument reminds me of Harold Wilson’s “The pound in your pocket” statement. In fact, its not clear that a lower currency would have helped Greece that much. When the Euro did fall, Germany whose economy is heavily export oriented did very well, but Greece, Spain, Portugal, Italy did not show any significant benefit from higher exports. That is because whereas Germany has built high value industries that can compete globally in that space, the peripheral economies have very little in the way of such industries. They continue to depend heavily on things such as Tourism, and agricultural exports. There are plenty of economies around the globe competing in these kinds of spaces.

    But, more significantly, the other side of the more competitive exports, is the much more expensive imports, and for such a devaluation to have been effective, it would have to have been a significant devaluation. It would mean many required imported goods would shoot up in price, such that Greek workers would face a rapidly rising cost of living. Eitehr they would face a consequent fall in living standards, or if they compensated through higher wages the advantages of more competitive exports would disappear in rising wage costs. In addition, the fact of such a devaluation, and of the inflation resulting would in any case then have led to a significant fall in Greek Bonds, once again raising interest charges.

    The only real solution for Greece outside a massive reduction in Greek living standards, is through growth, and a restructuring of the Greek economy towards higher value production. Greece has no chance of being able to mobilise the resources to bring about such a restructuring outside the EU.


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